In 1892, George Eastman formed the Eastman Kodak Company to "make the camera as convenient as a pencil." It was an idea whose time had come and by the early 20th century, Kodak emerged as one of America's largest companies and Eastman one of its most successful entrepreneurs.

It wasn't just that one idea that made the company so successful; it managed to stay on the bleeding edge for over a century, pioneering impressive new advancements in photographic paper, development and image processing. In 1975, it invented the digital camera, which would lead to its downfall as a major corporation.

The problem wasn't that Kodak didn't understand the potential, but that it became stuck in its operating model. It was so huge and so profitable, that almost any other opportunity seemed small by comparison. While Kodak is an extreme case, many others fail in new markets for similar reasons, they fail to bridge the gap between innovation and operations.

Seeing Innovation In Three Horizons

Innovation is never one thing or one event. In fact, it usually takes about 30 years to go from an initial discovery to a significant market impact (almost exactly 30 years in the case of digital photography). So we need to look at innovation in multiple dimensions in order to understand it properly.

One of the useful frameworks I described in my book, Mapping Innovation is the Three Horizons Model, which groups opportunities based on how they relate to current markets and capabilities. The first horizon is focused on your enterprise's current activities, while the second and third horizons focus on adjacencies and completely new activities.

The three horizons require vastly different perspectives. The first horizon is much like traditional strategy and rewards sound analysis and execution. The second horizon is more uncertain and requires some iteration to work out kinks. The third horizon is largely dependent on exploration and the willingness to charge boldly into the unknown.

The trap that many firms fall into is mistaking excellence in one horizon for excellence in another. Kodak, for example, excelled in the first horizon but failed to iterate and explore new markets as digital photography reshaped the marketplace.

Getting Trapped Inside Your P&L

Kodak had a uniquely profitable business. Because of the decades it spent innovating image processing, it thoroughly dominated the market for developing photos, which was highly lucrative. Every day, millions of people would come to one of their retail locations to get their prints, creating a constant revenue stream.

The digital photography business paled by comparison. It's not that Kodak ignored the technology—its EasyShare line of cameras, printers, and software were top sellers—nevertheless, the new revenues did little to replace the processing business, which was far more profitable.

Every successful business eventually faces the same dilemma. Second and third horizon opportunities are rarely as profitable in the beginning as first horizon innovations. So it's easy to get trapped in your P&L, choosing to focus on markets and capabilities you can quantify, rather than investing in more uncertain opportunities.

That's how good companies get stuck, by focusing solely on first horizon opportunities, you end up getting better and better at things that people care about less and less. That's what happened to Kodak. They remained dominant in the market for developing photos, but that market was disappearing. It was a burning platform.

Identifying the "Hair On Fire" Use Case

Another problem that established businesses have pursuing second and third horizon opportunities is that traditional business logic gets flipped on its head. When you are launching a conventional, first horizon product, you look for the largest possible addressable market in order to get the best possible return on your investment.

Yet in the second and third horizon, where things are more uncertain, that can spell disaster, because you lack understanding of what your customer's needs are. What might seem perfectly reasonable when you are reviewing a market analysis in the boardroom often fails utterly once it hits the reality of a real market with real stakeholders.

That's what happened to Google Glass, which launched with great fanfare in 2014 as an augmented reality consumer device for hipsters that could deliver a completely hands-free computing experience through conventionally looking glasses. It fared so poorly that people started calling those who bought the product "glassholes."

Yet today, Google Glass is gaining traction as an industrial device that can assist professionals in a work environment. From factory floors to operating rooms, the product is proving effective at improving productivity, safety and documenting procedures and an impressive ecosystem is forming to support Google Glass.

When you're developing a product that's truly new and different, what you want is not a large market, but a "hair on fire" use case where the customer needs the product so badly that they are willing to overlook minor glitches. So you need to build for the few, not the many. Once you establish a foothold, you can scale the business up from there.

Good Operational Practice Often Leads to Innovation Failure

To operate in a competitive market, you have to plan effectively. You need to hire the right people in the right quantity, invest in physical capital, equipment and marketing. If your estimates are off, you will either waste money on excess capacity or miss out on sales because you are unable to satisfy demand.

Yet this thinking often hinders the ability to innovate. The next big thing always starts out looking like nothing at all. So by instituting financial targets for a business that you don't fully understand, you will almost guarantee that your second and third horizon opportunities end up getting scaled back to a first horizon idea and, despite the best intentions, you will end up trapped in your P&L.

A number of companies have created separate units, such as IBM Research, Google X, and the General Electric's First Build innovation lab are set up specifically to pursue opportunities separately from the operational divisions. Failure rates tend to be much higher than would be tolerated in normal business practice, but the payoffs tend to more than offset them.